5 Ways Your Credit Score Can Drop (And What You Can Do To Recover)
One of your most valuable assets if your credit score, and a high one will allow you to receive the most competitive interest rates on home and car loans, or allow you to rent an apartment. In addition, credit scores are now being used to help set insurance rates.
So when there is a sudden drop in your credit score, you should be deeply concerned. Look out for these five ways that your credit score can drop, but know there are also some steps you can take to recover.
1. Missing payments. Your payment history is the most important factor in your credit score, and you should do everything possible to avoid making a late payment. But if you do make a mistake and miss a payment by accident, it’s important to contact the creditor and make a payment as quickly as possible. In many cases, a payment that is late by less than 30 days will not be reported to the credit bureaus, but otherwise the damage to your credit score quickly becomes more severe with each passing month. If a single late payment is bringing down your credit score, you may be able to have it removed by asking for a “goodwill” adjustment in writing.
2. Having a high debt to credit ratio. Credit scoring formulas treat low levels of debt favorably, but the amount of debt you have will always be relative to the total amount of credit you have been extended. Therefore, if you are using up a large portion of your total credit limit, it will reflect poorly on your credit report, even if you avoid interest charges by paying your balances in full each month. To improve your score, lower your outstanding balances as soon as possible. In fact, if you are spending heavily on your credit cards, you may even wish to pay them down before the statement closes, because it is your statement balance that is reported to the credit bureaus as debt. Once your debt to credit ratio has been lowered, be sure to ask for a larger credit limit to further help your credit score.
3. Applying for too many lines of credit. Another way your credit can suffer is when you apply for too many loans or credit cards within a short period. Doing so creates both new credit inquiries as well as newly opened accounts, each of which are interpreted by the credit scoring formula as signs that you may be in financial distress. Thankfully, the effect on your credit score can be quickly reversed by not applying for any additional new lines of credit for several months.
4. Closing several accounts. Perhaps one of the most counter-intuitive aspects of your credit score is the effect that closing accounts can have on it. Doing so reduces your available credit and will raise your debt to credit ratio for a given amount of debt. In addition, you will have less overall credit history, which can affect your credit score in the long run. To recover from this understandable mistake, you need to take steps to reduce your debt while increasing your total credit limit. One way pay down your balances while looking to increase your existing lines of credit. Also, you might wish to open some new lines of credit, albeit in moderation.
5. Mistakes on your credit report. If your credit score is low, and you don’t know why, there is a chance it is due to a mistake. Errors are common and can occur for a variety of reasons, ranging from mistaken identity to simple typos when someone entered the data. Be sure to check your credit reports at least once a year, or whenever you notice a change in your credit score. If you do catch a mistake, remember you have the right to dispute negative items on your credit report.